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March 30, 2009

The Game Changer for AT&T and Skype for iPhone

Why should AT&T be excited about Skype for iPhone: Because all of us iPhone users are paying minimum fees for service that we will use less and less in favor of Skype. The free Skype for iPhone application, due out tomorrow, will only work over Wi-Fi. (PC World has a full report including screen captures.)

Skype has 400 million users worldwide, and the voice quality tends to be better than that of the conventional POTS (plain old telephone service) or cellular network when there's sufficient bandwidth. With a user base that large, with a mobile version of Skype you're more likely to make Skype-to-Skype calls (which are free).

AT&T enabled the Wi-Fi part of this equation by belatedly offering free Wi-Fi for iPhone users to any of the nearly 20,000 in-network hotspots the company operates. AT&T acquired Wayport, its managed services provider for Wi-Fi hotspots, last year. This puts McDonald's, Starbucks, a number of hotels, and some chains under one plan, all free to iPhone users. (iPhone users should download and use Easy Wi-Fi for AT&T iPhones, a currently free app from Devicescape for automating your hotspot login.)

Why does this benefit AT&T? Every minute that you use over Skype over Wi-Fi is a minute that AT&T doesn't have to pay cellular transit costs for. Sure, AT&T makes money from selling you outside-plan minutes at about 25 to 50 cents a minute. But savvy user now buy unlimited plans or have pools large enough or use prepaid plans. I believe the fees from the overage charges are trending into place. Which means that AT&T would prefer you use less minutes, loading its network less.

Skype charges for calling to the public switched telephone network, a couple cents a minute to North America and many other countries or fixed monthly plans, but the margins are very thin there.

Let's say a billion minutes are siphoned from AT&T cell calls using the iPhone and now are made over Skype. Skype relies on peer-to-peer infrastructure for the most part (with some central authentication) for its Skype-to-Skype calling, so that's no skin off its nose. For AT&T, that's a billion minutes it doesn't have to carry with a commensurate drop in termination fees, carrying costs, and infrastructure buildout. Further, this encourage more use over Wi-Fi instead of over 3G, freeing 3G service by having people seek out Wi-Fi hotspots.

If you're like my wife and I, we already have the cheapest possible plan from AT&T: a family plan with two lines, the lowest number of minutes, and two iPhones (first generation). This still costs us $130 per month including taxes and we haven't been able to drop any lower with our current offering.

If we start calling a bunch over Skype for iPhone, then we're still paying that same $130 to AT&T, and yet we're using it less and less. It's all about margins. Skype still requires that someone else operate the network and the broadband, so even while Skype sucks minutes from the telecom infrastructure, it's hard to see how AT&T loses in this case because of the high fixed cost of obtaining a minimum cellular data plan.

iPod touch reaches out: The mobile Skype application works on the iPod touch, too, bringing such users access to a high-quality worldwide network of existing users and cheap calling. This device needs an external mike or headset (there's no microphone built in), but Apple revealed recently that 13 million iPod touch models have been sold. That's a big audience.